Energy security is, without doubt, one of the most critical topics policymakers and professionals are concerned with. However, producers and consumers add a different meaning to these two words: the latter interprets ‘energy security’ as the stable supply of sufficient energy, the former view it as the maximization of profit. The relative concentration of the world’s oil reserves in several regions has created a dependency on oil revenue which has been dubbed ‘the resource curse’: the paradox of plenty where an abundance of resources leads to inefficiency and slow economic growth.
Rapid changing oil prices can have serious consequences for countries strongly dependent on oil. Therefore, the Organization of Petroleum Exporting Countries, or OPEC, was founded in 1960. Its mission is not to raise prices to unreasonable heights but to "ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers". Despite OPEC's recent success in stabilizing and raising prices in collaboration with Russia, the world's oil markets are facing an imminent threat by the simple economic rationale of supply and demand.
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The world’s insatiable thirst for oil has pushed demand upwards over the past decades. Global consumption of crude is approaching a whopping 100 million barrels per day which is more than twice what it was 50 years ago. Furthermore, demand has been growing by approximately 1.5 percent a year. The relentless growth has justified massive investments in the oil industry. The energy sector has been built with more than $10 trillion of investor capital.
The production of oil requires significant time and capital investment before the rewards can be reaped. The depletion of wells requires the constant drilling of new ones to offset lost production. Until now, the global oil industry has been able to meet demand. However, technological and political developments could stir up the fundamentals of the oil market meaning supply and demand can no longer be aligned and prices stabilized. It also leads to producers having to supply a shrinking customer base, increasing competition and decreasing revenue. Due to plateauing demand, producers might not be able to give direction to crude prices any longer, which could impact the final investment decisions for projects with decade-long investment
cycles. Related: Survey: Experts See Brent Oil Price In The $60s In 2019
According to some analysts, global demand growth will decrease significantly during the coming years until it reaches a point where profitability is affected and thus the industry's ability to impact prices. Restrictions on single-use plastics are one area which could affect production. Citi noted in a report that countries across the globe are raising barriers. One example of this is China’s decision to stop the import of plastic waste. The European Union has also decided to restrict the use of plastic. McKinsey & Co. estimates that recycling and substitution of biomaterials could shave 2.5 million b/d off by 2035. Also, 60 percent of plastics used by 2050 could come from production based on previously used materials.
Another area that could affect the demand for oil is the global transportation sector. BP projects that rising populism and tariff wars could significantly harm trade activities and the global economy. In its “Less Globalization” scenario, BP predicts that economic expansion would lag about 6 percent compared with a business as usual projection for 2040, translating into approximately 2 percent lower oil demand. This estimate could prove optimistic, since next-generation manufacturing technologies, expanded use of optimization programs for logistics, and increased use of alternative fuels in trucks and delivery vehicles could bring much more substantial changes in oil use for aviation, shipping, and on-road freight.
Policies concerning proposed bans on new sales of internal combustion engine cars by 2040 in Europe and the ongoing discussion in China and India do follow suit could shave another 5 million b/d from future oil demand if implemented broadly. Policies that promote alternative sources of energy for buses and trucks, such as electricity and hydrogen could also significantly curb oil consumption. Related: U.S. Will Soon Export More Oil, Liquids Than Saudi Arabia
The future of the oil industry will largely depend on how investors and producers will manage their portfolio. The expected development of prices will determine investment decisions and thus production. This could somewhat alleviate the situation for traditional suppliers with low costs such as Middle Eastern producers as more capital intensive production such as Arctic, ultra-deepwater drilling and shale would be shelved first. Regardless of mitigating factors, long-term political and economic developments don't seem to be in favor of the oil industry.
By Vanand Meliksetian for Oilprice.com
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